Form 10-Q Ubiquiti Inc. For: Dec 31
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended December 31, 2022
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File No. 001-35300
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices, Zip Code)
(646 ) 780-7958
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | (Do not check if a smaller reporting company) | Smaller reporting company | |||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of February 2, 2023, 60,441,502 shares of Common Stock, par value $0.001, were issued and outstanding.
UBIQUITI INC.
INDEX TO
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED December 31, 2022
| Page | ||||||||
| PART I – FINANCIAL INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II – OTHER INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
2
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
UBIQUITI INC.
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
| December 31, 2022 | June 30, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Investments — short-term | |||||||||||
Accounts receivable, net of allowance for doubtful accounts of $ | |||||||||||
| Inventories | |||||||||||
| Vendor deposits | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets, net | |||||||||||
| Deferred tax assets | |||||||||||
| Other long-term assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Deficit | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Income taxes payable | |||||||||||
| Debt — short-term | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Income taxes payable — long-term | |||||||||||
| Operating lease liabilities —long-term | |||||||||||
| Debt — long-term | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
Commitments and contingencies (Note 9) | |||||||||||
| Stockholders’ deficit: | |||||||||||
Preferred stock—$ | |||||||||||
Common stock—$ | |||||||||||
| Additional paid–in capital | |||||||||||
| Accumulated other comprehensive (loss) | ( | ||||||||||
| Retained (deficit) | ( | ( | |||||||||
| Total stockholders’ (deficit) | ( | ( | |||||||||
| Total liabilities and stockholders’ deficit | $ | $ | |||||||||
See notes to consolidated financial statements.
3
UBIQUITI INC.
Consolidated Statements of Operations and Comprehensive Income
(In thousands, except per share amounts)
(Unaudited)
| Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenues | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenues | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Sales, general and administrative | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||
| Interest expense and other, net | ( | ( | ( | ( | |||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Net income per share of common stock: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average shares used in computing net income per share of common stock: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||
| Unrealized losses on available-for-sale securities | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive loss | |||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
See notes to consolidated financial statements.
4
UBIQUITI INC.
Consolidated Statements of Stockholders’ Equity (Deficit)
(In thousands, except per share amounts)
(Unaudited)
Three and Six Months Ended December 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity (Deficit) | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Amount | Amount | Amount | Amount | |||||||||||||||||||||||||||||||||
Balance at June 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||
| Net Income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | |||||||||||||||||||||||||||||||||||
| Restricted stock units issued, net of tax withholdings | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | ||||||||||||||||||||||||||||||||||
Dividends Paid on Common Stock ($ | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||
Balance at September 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||
| Net Income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Reclassification adjustment for loss on investments included in net income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Restricted stock units issued, net of tax withholdings | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | ||||||||||||||||||||||||||||||||||
Dividends Paid on Common Stock ($ | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||
Balances at December 31, 2022 | $ | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||
5
Three and Six Months Ended December 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity (Deficit) | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Amount | Amount | Amount | Amount | |||||||||||||||||||||||||||||||||
Balance at June 30, 2021 | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||
| Net Income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | |||||||||||||||||||||||||||||||||||
| Restricted stock units issued, net of tax withholdings | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||
| Repurchases of Common Stock | ( | ( | ( | — | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | ||||||||||||||||||||||||||||||||||
Dividends Paid on Common Stock ($ | — | $ | — | $ | — | $ | ( | $ | — | $ | ( | |||||||||||||||||||||||||||
Balance at September 30, 2021 | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||
| Net Income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | |||||||||||||||||||||||||||||||||||
| Restricted stock units issued, net of tax withholdings | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||
| Repurchases of Common Stock | ( | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | ||||||||||||||||||||||||||||||||||
Dividends Paid on Common Stock ($ | — | $ | — | $ | — | $ | ( | $ | — | $ | ( | |||||||||||||||||||||||||||
Balances at December 31, 2021 | $ | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||
See notes to consolidated financial statements.
6
UBIQUITI INC.
Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
| Six Months Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash Flows from Operating Activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Non-cash lease expense | |||||||||||
| Premium amortization and (discount accretion), net | |||||||||||
| Provision for inventory obsolescence | |||||||||||
| Provision for loss on vendor deposits and purchase commitments | ( | ||||||||||
| Stock-based compensation | |||||||||||
| Provisions for doubtful accounts | ( | ||||||||||
| Deferred taxes | |||||||||||
| Recovery of impaired investment | ( | ||||||||||
| Change in unrealized loss on available-for-sale securities | |||||||||||
| Other, net | ( | ( | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Inventories | ( | ( | |||||||||
| Vendor deposits | ( | ||||||||||
| Prepaid expenses and other assets | ( | ||||||||||
| Accounts payable | ( | ||||||||||
| Income taxes payable | ( | ( | |||||||||
| Deferred revenues | ( | ( | |||||||||
| Accrued and other liabilities | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Purchase of property and equipment and other long-term assets | ( | ( | |||||||||
| Purchase of investments | ( | ||||||||||
| Proceeds from maturities of investments | |||||||||||
| Net cash (used in) investing activities | ( | ( | |||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Proceeds from borrowing under the credit facility- Revolver | |||||||||||
| Repayment against credit facility- Revolver | ( | ||||||||||
| Repayment against credit facility- Term | ( | ( | |||||||||
| Repurchases of common stock | ( | ||||||||||
| Payment of common stock cash dividends | ( | ( | |||||||||
| Proceeds from exercise of stock options | |||||||||||
| Tax withholdings related to net share settlements of restricted stock units | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Supplemental Disclosure of Cash Flow Information: | |||||||||||
| Income taxes paid, net of refunds | $ | $ | |||||||||
| Interest paid | $ | $ | |||||||||
| Non-Cash Investing and Financing Activities: | |||||||||||
| Right-of-use asset recognized | $ | $ | |||||||||
| Unpaid property and equipment and other long-term assets | $ | $ | |||||||||
See notes to consolidated financial statements.
7
UBIQUITI INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—BUSINESS AND BASIS OF PRESENTATION
Business— Ubiquiti Inc. and its wholly owned subsidiaries (collectively, “Ubiquiti” or the “Company”) develop high performance networking technology for service providers, enterprises, and consumers globally.
The Company operates on a fiscal year ending June 30. In these notes, Ubiquiti refers to the fiscal years ending June 30, 2023 and 2022, as fiscal 2023 and fiscal 2022 respectively.
Basis of Presentation— The Company’s consolidated financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) related to interim financial statements based on applicable Securities and Exchange Commission (“SEC”) rules and regulations. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. These consolidated financial statements reflect all adjustments, which are, in the opinion of the Company, of a normal and recurring nature and those necessary to state fairly the statements of financial position, results of operations and cash flows for the dates and periods presented. The June 30, 2022 balance sheet was derived from the audited consolidated financial statements as of that date. All significant intercompany transactions and balances have been eliminated.
These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended June 30, 2022, included in its Annual Report on Form 10-K, as filed with the SEC on August 26, 2022 (the “Annual Report”). The results of operations for the three and six months ended December 31, 2022 are not necessarily indicative of the results to be expected for any future periods.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are disclosed in its audited consolidated financial statements for the fiscal year ended June 30, 2022, included in the Annual Report on Form 10-K. There have been no changes to the Company’s significant accounting policies as discussed in the Annual Report.
NOTE 3—REVENUES
Revenue is primarily generated from the sale of hardware as well as the related implied post contract services ("PCS").
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Revenue is recognized when obligations under the terms of a contract with our customers are satisfied; generally, this occurs with the transfer of control of our products and PCS to our customers. Transfer of control to the customer for products generally occurs at the point in time when products have been shipped to our customer as this represents the point in time when the customer has a present obligation to pay and physical possession including title and risk of loss have been transferred to the customer. Revenue for PCS is recognized ratably over time over the estimated period for which implied PCS services will be delivered.
Disaggregation of Revenue
See Note 13, "Segment Information, Revenues by Geography and Significant Customers" for disaggregation of revenue by product category and geography.
8
Contract Balances
The timing of revenue recognition, billing and cash collections results in billed accounts receivable, deferred revenue primarily attributable to PCS and customer deposits on the consolidated balance sheets. Accounts receivable are recognized in the period our right to the consideration is unconditional. Our contract liabilities consist of advance payments (Customer deposits) as well as billing in excess of revenue recognized primarily related to deferred revenue. We classify customer deposits as a current liability, and deferred revenue as a current or non-current liability based on the timing of when we expect to fulfill these remaining performance obligations. The current portion of deferred revenue is included in other current liabilities and the non-current portion is included in other long-term liabilities in our consolidated balance sheets.
As of December 31, 2022 and June 30, 2022, the Company’s customer deposits were $0.9 million and $1.1 million, respectively.
As of December 31, 2022, the Company’s deferred revenue, included in other current liabilities and other long-term liabilities, was $19.1 million and $6.2 million, respectively.
As of June 30, 2022, the Company’s deferred revenue, included in other current liabilities and other long-term liabilities, was $20.8 million and $5.8 million, respectively.
NOTE 4—EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data):
| Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average shares used in computing basic earnings per share | |||||||||||||||||||||||
| Add—dilutive potential common shares: | |||||||||||||||||||||||
| Stock options | |||||||||||||||||||||||
| Restricted stock units | |||||||||||||||||||||||
| Weighted-average shares used in computing diluted net income per share | |||||||||||||||||||||||
| Net income per share of common stock: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
The Company excludes potentially dilutive securities from its diluted net income per share calculation when their effect would be anti-dilutive to net income per share amounts.
NOTE 5—BALANCE SHEET COMPONENTS
Inventories
Inventories consisted of the following (in thousands):
| December 31, 2022 | June 30, 2022 | ||||||||||
| Finished goods | $ | $ | |||||||||
| Raw materials | |||||||||||
| Total | $ | $ | |||||||||
9
Property and Equipment, Net
| December 31, 2022 | June 30, 2022 | ||||||||||
| Testing equipment | $ | $ | |||||||||
| Tooling equipment | |||||||||||
| Leasehold improvements | |||||||||||
| Computer and other equipment | |||||||||||
| Software | |||||||||||
| Furniture and fixtures | |||||||||||
| Corporate aircraft | |||||||||||
| Property and equipment, gross | |||||||||||
| Less: Accumulated depreciation | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
Other Long-term Assets
Other long-term assets consisted of the following (in thousands):
| December 31, 2022 | June 30, 2022 | ||||||||||
Hong Kong Tax deposit (1) | |||||||||||
Intangible assets, net (2) | |||||||||||
| Other long-term assets, net | |||||||||||
| Total | $ | $ | |||||||||
(1) The Company expects the deposits made with the Hong Kong Inland Revenue Department (“IRD”) to be refunded upon completion of the audit. See Note 12, "Income Taxes" to the consolidated financial statements for additional details regarding this ongoing tax audit.
(2) Accumulated amortization was $5.1 million and $4.3 million as of December 31, 2022, and June 30, 2022, respectively.
Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
| December 31, 2022 | June 30, 2022 | ||||||||||
| Deferred revenue — short-term | $ | ||||||||||
| Accrued expenses | |||||||||||
| Lease liability— current | |||||||||||
| Warranty accrual | |||||||||||
| Accrued compensation and benefits | |||||||||||
| Customer deposits | |||||||||||
| Reserve for sales returns | |||||||||||
| Inventory received not billed | |||||||||||
| Other payables | |||||||||||
| Total | $ | $ | |||||||||
Other Long-Term Liabilities
| December 31, 2022 | June 30, 2022 | ||||||||||
| Deferred Revenue — long-term | $ | $ | |||||||||
10
NOTE 6—ACCRUED WARRANTY
Warranty obligations, included in other current liabilities, were as follows (in thousands):
| Six Months Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Beginning balance | $ | $ | |||||||||
| Accruals for warranties issued during the period | $ | ||||||||||
| Changes in liability for pre-existing warranties during the period | $ | ||||||||||
| Settlements made during the period | $ | ( | ( | ||||||||
| Ending balance | $ | $ | |||||||||
NOTE 7—DEBT
On March 30, 2021, the Company, as borrower and certain domestic subsidiaries entered into an amended and restated credit agreement (the “Third Amended and Restated Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), the other financial institutions named as lenders therein, and Wells Fargo as administrative agent and collateral agent for the lenders, that extended the $700 million senior secured revolving credit facility (the “Revolving Facility”) and provided a new $500 million senior secured term loan facility (the “Term Facility”, together with the Revolving Facility, the “Facilities”), and extended the maturity of the Facilities to March 30, 2026. In addition, the Facilities include an option to request increases in the amounts of such credit facilities by up to an additional $500 million in the aggregate.
The Company has $1.9 million of debt issuance costs which are capitalized and are being amortized as interest expense over the remaining life of the facilities.
The Company’s Debt consisted of the following (in thousands):
| December 31, 2022 | June 30, 2022 | ||||||||||
| Term Facility - short term | $ | $ | |||||||||
| Debt issuance costs, net | ( | ( | |||||||||
| Total Debt - short term | |||||||||||
| Term Facility - long term | |||||||||||
| Revolving Facility - long term | |||||||||||
| Debt issuance costs, net | ( | ( | |||||||||
| Total Debt - long term | $ | $ | |||||||||
The Revolving Facility includes a sub-limit of $25.0 million for letters of credit and a sub-limit of $25.0 million for swingline loans. The Facilities are available for working capital and general corporate purposes that comply with the terms of the Third Amended and Restated Credit Agreement, including to finance the repurchase of the Company’s common stock or to make dividends to the holders of the Company’s common stock. Under the Third Amended and Restated Credit Agreement, revolving loans and swingline loans may be borrowed, repaid and reborrowed until March 30, 2026, at which time all amounts borrowed must be repaid. The Term Facility is payable in quarterly installments of 1.25 % of the original principal amount of the Term Facility, commencing with the quarter ending June 30, 2021. The Facilities may be prepaid at any time without penalty.
Revolving and Term facilities bear interest, at the Company’s option, at either (i) a floating rate per annum equal to the base rate plus a margin of between 0.50 % and 1.25 %, depending on the Company’s consolidated total leverage ratio as of the most recently ended fiscal quarter or (ii) a floating per annum rate equal to the applicable LIBOR rate (or replacement rate) for a specified period, plus a margin of between 1.50 % and 2.25 %, depending on the Company’s consolidated total leverage ratio as of the most recently ended
11
fiscal quarter. Swingline loans bear interest at a floating rate per annum equal to the base rate plus a margin of between 0.50 % and 1.25 %, depending on the Company’s consolidated total leverage ratio as of the most recently ended fiscal quarter. Base rate is defined as the greatest of (A) Wells Fargo’s prime rate, (B) the federal funds rate plus 0.50 % or (C) the applicable LIBOR rate (or replacement rate) for a period of one month plus 1.00 %. A default interest rate shall apply on all obligations during certain events of default under the Third Amended and Restated Credit Agreement at a rate per annum equal to 2.00 % above the applicable interest rate. The Company will pay to each lender a facility fee on a quarterly basis based on the unused amount of each lender’s commitment to make revolving loans, of between 0.20 % and 0.35 %, depending on the Company’s consolidated total leverage ratio as of the most recently ended fiscal quarter. The Company will also pay to the applicable lenders on a quarterly basis certain fees based on the daily amount available to be drawn under each outstanding letter of credit, including aggregate letter of credit commissions of between 1.50 % and 2.25 %, depending on the Company’s consolidated total leverage ratio as of the most recently ended fiscal quarter, and issuance fees of 0.125 % per annum. The Company is also obligated to pay Wells Fargo, as agent, fees customary for a credit facility of this size and type.
The Third Amended and Restated Credit Agreement requires the Company to maintain during the term of the Facilities a maximum consolidated total leverage ratio of 3.50 to 1.00 and a minimum consolidated interest coverage ratio of 3.50 to 1.00. In addition, the Third Amended and Restated Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the ability of the Company and its subsidiaries to, among other things, grant liens or enter into agreements restricting their ability to grant liens on property, enter into mergers, dispose of assets, change their accounting or reporting policies, change their business and incur indebtedness, in each case subject to customary exceptions for a credit facility of this size and type. The Third Amended and Restated Credit Agreement includes customary events of default that include, among other things, non-payment of principal, interest or fees, inaccuracy of representations and warranties, violation of covenants, cross default to certain other indebtedness, bankruptcy and insolvency events, material judgments, change of control and certain ERISA events. The occurrence of an event of default could result in the acceleration of the obligations under the Third Amended and Restated Credit Agreement.
The Facilities
As of December 31, 2022, $456.3 million was outstanding on the Term Facility and $440 million outstanding on the Revolving Facility, leaving $260 million available on the Revolving Facility.
Term Facility
During the six months ended December 31, 2022, the Company made aggregate payments of $23.3 million under the Term Facility, of which $12.5 million was repayment of principal and $10.8 million was payment of interest.
As of December 31, 2022, the interest rate on the Term Facility was 6.13 %. This interest rate reset on January 30, 2023.
Revolving Facility
Under the Third Amended and Restated Credit Agreement, during the six months ended December 31, 2022, the Company made aggregate payments of $67.7 million under the Revolving Facility, of which $60 million was repayment of principal and $7.7 million was payment of interest. As of December 31, 2022, the interest rates on the Revolving Facility were 6.04 % - 6.10 %.
The following table summarizes the Company’s estimated debt and interest payment obligations as of December 31, 2022, for the remainder of fiscal 2023 and future fiscal years (in thousands):
2023 (remainder) | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | |||||||||||||||||||||||||||||||||||
| Debt payment obligations | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
Interest and other payments on debt payment obligations (1) | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
(1) Interest payments are calculated based on the applicable rates and payment dates as of December 31, 2022 and assumes the outstanding revolver balance remains at $440 million. Although the Company’s interest rates on debt obligations may vary, the Company has assumed the most recent available interest rates for all periods presented.
NOTE 8—LEASES
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exercise the extension options. Most of our leases require us to pay certain operating expenses in addition to base rent, such as taxes, insurance and maintenance costs.
| Financial Statement Classification | Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
| Operating lease costs: | ||||||||||||||||||||||||||||||||
| Fixed lease costs | Operating expenses | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Fixed lease costs | Cost of revenues | |||||||||||||||||||||||||||||||
| Variable lease costs | Operating expenses | |||||||||||||||||||||||||||||||
| Variable lease costs | Cost of revenues | |||||||||||||||||||||||||||||||
| Total lease costs | $ | $ | $ | $ | ||||||||||||||||||||||||||||
The operating lease costs in the table above include costs for long-term and short-term leases. Total short-term costs for the three and six months ended December 31, 2022 and 2021 were immaterial 4.0 million and $3.5 million, respectively. For the six months ended December 31, 2022 and 2021, cash paid for amounts associated with the Company’s operating lease liabilities were approximately $7.6 million and $6.5 million, respectively. Cash paid for amounts associated with the Company’s operating lease liabilities were classified as operating activities in the consolidated statement of cash flows.
The following table shows the Company’s undiscounted future fixed payment obligations under the Company’s recognized operating leases and a reconciliation to the operating lease liabilities as of December 31, 2022:
Remainder of Fiscal 2023 | $ | |||||||
Fiscal 2024 | ||||||||
Fiscal 2025 | ||||||||
Fiscal 2026 | ||||||||
Fiscal 2027 | ||||||||
| Thereafter | ||||||||
| Total future fixed operating lease payments | $ | |||||||
| Less: Imputed interest | $ | |||||||
| Total operating lease liabilities | $ | |||||||
| Weighted-average remaining lease term - operating leases | ||||||||
| Weighted-average discount rate - operating leases | % | |||||||
NOTE 9—COMMITMENTS AND CONTINGENCIES
Operating Leases
See Note 8, "Leases" for future minimum lease payments under non-cancelable operating leases as of December 31, 2022.
Purchase Obligations
We subcontract with third parties to manufacture our products and have purchase commitments with key component suppliers. During the normal course of business, the Company’s contract manufacturers procure components and manufacture products based upon orders placed by us. If we cancel all or part of the orders, we may still be liable to the contract manufacturers for the cost of the components purchased by the subcontractors to manufacture our products. We periodically review the potential liability. There have been no significant liabilities for cancellations recorded as of December 31, 2022. Our consolidated financial position and results of operations could be negatively impacted if we were required to compensate the contract manufacturers for any unrecorded liabilities
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incurred. We may be subject to additional purchase obligations for supply agreements and components ordered by our contract manufacturers based on manufacturing forecasts we provide them each month. We estimate the amount of these additional purchase obligations to range from $440.6 million to $916.5 million as of December 31, 2022, depending upon the timing of orders placed for these components by our contract manufacturers.
Other Obligations
As of December 31, 2022, the Company has other obligations of $5.4 million which consisted primarily of commitments related to research and development projects.
Indemnification Obligations
The Company enters into standard indemnification agreements with many of its business partners in the ordinary course of business. These agreements include provisions for indemnifying the business partner against any claim brought by a third-party to the extent any such claim alleges that a Company product infringes a patent, copyright or trademark, or violates any other proprietary rights of that third-party. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is not estimable and the Company has not incurred any material costs to defend lawsuits or settle claims related to these indemnification agreements to date.
Legal Matters
The Company may be involved, from time to time, in a variety of claims, lawsuits, investigations, and proceedings relating to contractual disputes, intellectual property rights, employment matters, regulatory compliance matters and other litigation matters relating to various claims that arise in the normal course of business. The Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. The Company assesses its potential liability by analyzing specific litigation and regulatory matters using available information. The Company develops its views on estimated losses in consultation with inside and outside counsel, which involves a subjective analysis of potential results and outcomes, assuming various combinations of appropriate litigation and settlement strategies. Taking all of the above factors into account, the Company records an amount where it is probable that the Company will incur a loss and where that loss can be reasonably estimated. However, the Company’s estimates may be incorrect and the Company could ultimately incur more or less than the amounts initially recorded. The Company may also incur significant legal fees, which are expensed as incurred, in defending against these claims. The Company is not currently aware of any pending or threatened litigation that would have a material adverse effect on the Company’s financial statements.
Vivato/XR
On April 19, 2017, XR Communications, LLC, d/b/a Vivato Technologies (“Vivato”), filed a complaint against the Company in the United States District Court for the Central District of California, alleging that at least one of the Company’s products infringes United States Patent Numbers 7,062,296 (the “’296 Patent”), 7,729,728 (the “’728 Patent”), and 6,611,231 (the “’231 Patent” and, collectively, the “Patents-in-Suit”), (the “Original Action”). On April 11, 2018, the Court stayed the Original Action pending completion of certain inter partes review (“IPR”) proceedings before the Patent Trial and Appeal Board (“PTO”). The PTO invalidated asserted claims of two of the three Patents-in-Suit. The District Court lifted the stay on March 1, 2021 to resume proceedings on the ’231 Patent in the Original Action.
On June 16, 2021, Vivato filed a new suit against the Company in the Central District of California, alleging that various Company products infringe some of the non-invalidated claims of the ’728 Patent and U.S. Patent No. 10,594,376 (the “New Action”). The New Action, as well as four similar new lawsuits filed by Vivato against other defendants in the same jurisdiction, were consolidated into the Original Action. On November 24, 2021, the Company and the remaining defendants in the Original Action filed a motion for judgment on the pleadings regarding the ’231 Patent. On January 4, 2022, the Court granted defendants’ motion and dismissed Vivato’s claims based on the ’231 Patent. That ruling is now on appeal. All claims asserted against the Company in the Original Action have been dismissed.
On April 18, 2022, the court granted in part the motion for judgment on the pleadings with respect to the ’728 patent, dismissing one of the four remaining claims.
On July 28, 2022, Vivato voluntarily dismissed, with prejudice, its remaining claims related to the ’728 patent, as well as claims 22-31 of the ‘376 Patent. On October 20, 2022, an IPR was instituted with respect to the asserted claims of the ’376 Patent. On October 26, 2022, the court stayed the case pending completion of the IPR.
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NOTE 10—COMMON STOCK AND TREASURY STOCK
NOTE 11—STOCK BASED COMPENSATION
Stock-Based Compensation Plans
The Company’s 2020, 2010 and 2005 Equity Incentive Plan are described in the Company’s Annual Report.
As of December 31, 2022, the Company had 4,960,216 authorized shares available for future issuance under all of its stock incentive plans.
Stock-Based Compensation
The following table shows total stock-based compensation expense included in the consolidated statements of operations and comprehensive income for the three and six months ended December 31, 2022 and 2021 (in thousands):
| Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Cost of revenues | $ | $ | $ | $ | |||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Sales, general and administrative | |||||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||
Stock Options
The following is a summary of option activity for the Company’s stock incentive plans for the six months ended December 31, 2022:
| Common Stock Options Outstanding | |||||||||||||||||||||||
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value (In thousands) | ||||||||||||||||||||
Balance, June 30, 2022 | $ | $ | |||||||||||||||||||||
| Exercised | ( | $ | |||||||||||||||||||||
| Forfeitures and cancellations | |||||||||||||||||||||||
Balance, December 31, 2022 | $ | — | $ | ||||||||||||||||||||
Vested as of December 31, 2022 | $ | — | $ | ||||||||||||||||||||
Vested and exercisable as of December 31, 2022 | $ | — | $ | ||||||||||||||||||||
During the three months ended December 31, 2022 and 2021, the aggregate intrinsic value of options exercised under the Company’s stock incentive plans was $0.0 million and $0.7 million, respectively, as determined as of the date of option exercise.
During the six months ended December 31, 2022 and 2021, the aggregate intrinsic value of options exercised under the Company’s stock incentive plans was $0.6 million and $1.3 million, respectively, as determined as of the date of option exercise.
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As of December 31, 2022, the Company had no unrecognized compensation costs related to stock options.
The Company did no
Restricted Stock Units (“RSUs”)
The following table summarizes the activity of the RSUs made by the Company:
| Number of Shares | Weighted Average Grant Date Fair Value Per Share | ||||||||||
Non-vested RSUs, June 30, 2022 | $ | ||||||||||
| RSUs granted | $ | ||||||||||
| RSUs vested | ( | $ | |||||||||
| RSUs canceled | ( | $ | |||||||||
Non-vested RSUs, December 31, 2022 | $ | ||||||||||
The intrinsic value of RSUs vested in the three months ended December 31, 2022 and 2021 was $